Setting up a consortium and transfer pricing obligations

A consortium is a collaboration of at least two businesses to achieve a predetermined goal or to carry out a specific project for mutual benefits.

A consortium is set up under a consortium agreement which is one of the so-called innominate contracts: those without normative reference in legal acts. The basis for its conclusion is the principle of freedom of contract expressed in the Civil Code.

Importantly, a consortium is not a commercial law company or a civil partnership (it has no legal personality). It is not subject to registration in the CEIDG. Since a consortium is not a separate entity and is not a VAT taxpayer, any transfer pricing obligations rest with the consortium participants. If there are relations between the members of the consortium already at the stage of making the consortium agreement, then the very fact of entering into such an agreement triggers transfer pricing obligations.

Is a consortium agreement surely a controlled transaction?

Yes, ‘but’.

The amendment to the income tax laws, which came into force on 1 January 2015, expanded the list of transactions subject to documentation requirements. It included, among others, the company deed for a company that is not a legal entity or a joint venture agreement. Admittedly, the lawmaker did not define joint venture agreements. The only reference to this transaction is Article 5 of the CIT Act (in its current wording). It addresses the settlement of income and expenses in proportion to the right to share in profit (participation) under, among others, joint ventures and company deeds for businesses that are not legal entities. Given the above, the rationale for classifying a transaction as a joint venture is the share of its participants in the income and expenses obtained / incurred in pursuit of the common economic objective. In practice, it is assumed that joint ventures are considered to include consortium agreements – according to the judgment of the Supreme Administrative Court of 23 November 2012 (ref. no. II FSK 614/11).

However, the situation becomes more complicated. In the regulations effective from 1 January 2019. (i.e. the CIT / PIT Law), the lawmaker has not explicitly stated that joint venture agreements are a controlled transaction triggering the transfer pricing documentation obligation. Therefore, general interpretation of the Minister of Finance dated 29 December 2021 should be referred to which addresses the definition of a controlled transaction (DCT1.8203.4.2020.). The definition of a controlled transaction consists of three elements. A transaction is a controlled one only if they are in place jointly.

From the perspective of evaluating a consortium agreement as a controlled transaction, what matters is the presence of an activity of an economic nature. An activity of an economic nature should meet the characteristics of an activity with a profit-making purpose, should be conducted continuously and independently and within an organized structure. Such features are contained in the consortium agreement, in particular the profit-making purpose, since the intention of the joint venture is primarily to make profit. It should therefore be assumed that the consortium agreement constitutes a controlled transaction subject to transfer pricing documentation and reporting obligations.

So what are the responsibilities of the consortium participants?

As stated in the introduction, a consortium agreement is subject to transfer pricing regulations when it is entered into between related parties. The making of such an agreement is a controlled transaction and (if it does not benefit from an exemption) is subject to the obligation to prepare transfer pricing documentation as well as to reporting using the TP-R form.

Moreover, the making of a consortium agreement creates relations. Thus, making other transactions between consortium participants later on may trigger transfer pricing obligations. So, what is important and should be emphasized: even if there were no relations referred to in the transfer pricing regulations between consortium members at the stage of making the consortium agreement, due to the making of the consortium agreement and for its term, these entities will be considered related.

Notwithstanding the above, keep in mind the obligations involved when entering into transactions with tax haven entities: related and third party. Making transactions by consortium participants with tax haven entities may trigger the obligation to prepare transfer pricing documentation (and to list this transaction in the TP-R form).

How to determine the value of a transaction?

Income Tax Acts do not define the value to be taken as the value of the transaction in the case of a consortium agreement. The lawmaker only stated that the value of the controlled transaction corresponds to the value inherent in the controlled transaction. Making a consortium agreement, in principle, requires no contributions, so the value of the joint venture is taken as the value of the transaction.

The challenge may be to relate the value of the transaction to the statutory documentation thresholds (i.e. whether to apply the PLN 10 million threshold for commodity and financial transactions or the PLN 2 million threshold for the service of other transactions). Since the consortium agreement is not listed in the current wording of the income tax acts, it is impossible to clearly indicate how the value of the transaction should be determined and to which threshold it should be referred. Therefore, it is best to analyze these issues keeping in mind the subject matter and purpose of such an agreement. Consortium agreements may be made, among others, for the purpose of jointly selling certain goods, or providing services, or providing financing. Thus, referring the value of the transaction to the statutory threshold should be analyzed in each case from the perspective of the consortium agreement itself and the nature of the cooperation of its participants. An example would be a consortium made by related parties for the purpose of selling certain goods. In such a case, it can be assumed that the transaction is of a commodity nature subject to the statutory threshold of PLN 10 million. Please note that separate thresholds are set for the so-called tax haven transactions: PLN 2.5 million for financial transactions and PLN 500,000 for non-financial transactions.

Summary

A consortium agreement fits the definition of a controlled transaction. Therefore, it may be subject to transfer pricing obligations as long as its members are related at the time of the agreement. It is therefore crucial to correctly identify the relations, especially in the case of more complex structures. However, if the relations did not exist upon making the consortium agreement, entering into it gives rise to relations from the property relationships between its members.